Wriston

Topics: Contract, Touring car racing, Net present value Pages: 4 (966 words) Published: April 21, 2014
Memorandum
To: Sam Sullivan
Subject: Detroit Plant

Wriston Manufacturing’s Heavy Equipment Division (HED) Detroit plant has been performing below its plant peers and its operations can no longer be sustained long term. Profitability of each HED plant is measured on a standalone basis, which has distorted the Detroit plant’s profitability metrics. Detroit is a job shop, tasked with production of low volume products and prototyping. Once a product becomes profitable it is moved to another, higher volume plant, boosting that plant’s profits at the expense of Detroit. This erosion of Detroit’s profitability has resulted in a lack of reinvestment in the plant, leading to its deterioration. Management has identified 3 options of addressing the Detroit Plant issue: close the Detroit plant and move production to existing plants, invest in tooling for the plant to run at existing levels for a 5-10 year period, or sell Detroit and build a new plant.

Option 1
Detroit produces 3 product lines, referred to as Group 1, 2, and 3. A feasibility study recommends that Group 1 products be transferred to either Fremont, Maysville or Lancaster. The study fails to consider that Fremont is a highly specialized machining plant not conducive to job shop production and is operating at 88% capacity. Adding to the capacity and introducing variability would likely overwhelm the plant. Lancaster is an assembly only, high volume flow shop plant, and incompatible with Detroit’s production. Consequently the only viable plant to move Group 1 to is Maysville, returning an NPV of 3.4M (Appendix 1). Group 2, could be moved to Saginaw or Lima. Saginaw is a low-medium volume plant making it preferable to Lima, a high volume flow shop. However Saginaw is currently operating at 94% capacity and would not be able to absorb all of Detroit’s Group 2 production. Medium volume production should be moved from Saginaw to Lima, freeing up capacity at Saginaw and boosting production at Lima,...
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